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Are bond rates responding to EU bailouts?

August 23, 2011

It has now been a month since European leader agreed to the second bailout for Greece, and the results appear to be mixed.  As the graph below shows, while Greek interest rates dramatically fell right after the summit announcing the new bailout package (indicated by the rightmost red dashed line), rates have been creeping up since then.  In fact, the markets are now worried that this second bailout package will fall apart, as Finland is now demanding that Greece puts up collateral to secure the Finnish support.  Other EU member states are now considering similar actions.

On the other hand, things are looking a little brighter for the two other countries which have received EU bailouts in the last year.  Rates for Portugal have decreased by about 3%, while Irish rates have fallen by 22% in the last month.  In addition, on August 1, Irish rates were lower than Portuguese rates for the first time since September 2008.  While it is too early to say that Ireland is out of the woods, as economic growth is predicted to be sluggish, the signs are somewhat encouraging.  However, the strength of this recovery will become clearer as more Irish data becomes available.

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